Iron Mountain's board soon came to terms with the successful New York hedge fund, after The Wall Street Journal reported that the activist camp had been joined by the company's largest shareholder, Davis Selected Advisors, a well-known investment firm that had spent over $900 million on its 21% position. Iron Mountain replaced its chief executive, sold its digital business, and in June of this year announced plans to become a REIT.

Iron Mountain sold its digital-storage business to focus on traditional archiving. Shown here is an underground facility for film preservation in Pennsylvania.
James Leynse/Corbis

But even as the activist shareholders won reforms they said were worth upward of 50 bucks on the stock, Elliott and Davis were selling their positions at levels around the current price of $33. In the past 12 months, Tucson, Ariz.-based Davis Advisors cut its Iron Mountain holdings by more than half, according to regulatory filings. Similarly, filings by Elliott Management show that in the three months ended June 2012, its holdings dropped from 8.5 million shares to zero. Elliott wouldn't comment, and a spokesperson for Davis Advisors said the firm doesn't discuss individual positions.

Other shareholders might want to take a cue from the smart money. The rules for REITs require Iron Mountain to make a lump distribution of retained earnings before converting, and the company says it hopes to pay out a large part of that $1 billion to $1.5 billion this year—yet Elliott didn't stick around for that $5-plus dividend per share.

It's impossible to know what prompted the sales, but an appraisal of Iron Mountain's prospects suggests the shares are fully valued, whether or not the archival outfit attains its goal of becoming a REIT by the start of 2014. At $33, the company enjoys an enterprise value near $9 billion, counting its stock-market capitalization and some $3.3 billion of debt (net of cash). That's 10 times the Ebitda (earnings before interest, taxes, depreciation, and amortization) forecast for 2012 by Piper Jaffray analyst George Tong, who initiated coverage in June, when the stock was $27.53, with an Overweight rating. Tong, who likes the potential of the REIT structure, noted that the enterprise value of other outsourcing and business-support companies averaged about 7.5 times Ebitda.

Valuing Iron Mountain's business as a REIT—with the consequent tax savings—the Piper analyst projected about $360 million in 2013 year "adjusted funds from operations." AFFO takes net income, adds back depreciation, but subtracts essential capital spending. Comparable REITs traded for 18 times 2013 AFFO numbers. Adjusting for the shares that Iron Mountain will issue in its $1 billion-plus distribution this year, its 2013 earnings, if it were a REIT, would amount to $1.80 a share. An 18-times multiple supports a share price at about the current level.

THE GROWTH OUTLOOK FOR THOSE earnings may be more muted than that of other REITs. While the "paperless office" remains far off, there's no denying that digital record-keeping and storage in the Internet "cloud" are taking hold at hospitals, law firms, and government. Iron Mountain's internal revenue growth slipped from above 10% in 2007, to less than 2% in 2011.

Iron Mountain customers tend to leave records in its warehouses for 15 years, notes the company's investor relations man Stephen Golden. "Inertia is a powerful force in our business," he says. "The heyday of 10% growth is over, but we are a solid, durable business."

Getting 56% of its revenue from simply collecting rent on customers' stored records, Iron Mountain enjoys operating profit margins of 30%, after backing out noncash expenses like depreciation. That has allowed it to pay dividends of $1.08 a share, which represents a 3.3% yield. Other revenues come from services like record retrieval, a part of the business that has softened in recent years, as doctors move from X-ray films to digital scans.

The Bottom Line

Iron Mountain shares look fully valued at $33, their current level. There doesn't seem to be any immediate prospect of their reaching the $50-plus level promised by activist investors.

The REIT structure would shelter Iron Mountain's rental revenues from federal tax. Depending on how much of its service revenue also qualifies for sheltering, the annual tax savings could range from 35 cents to 65 cents a share. The Internal Revenue Service could take six to 12 months to rule on Iron Mountain's REIT application, filed in July.

Golden says that Iron Mountain is "reasonably confident" of IRS approval. In the meantime, the company must purge a billion-plus from its balance sheet; the payout to shareholders will be 20% cash and 80% stock. Iron Mountain had no comment on the hedge funds' stock sales.

Iron Mountain is doing a great job returning cash to stockholders. But the sales by Davis Advisors and Elliott Management hint the payouts are priced into the stock.